Growth Insights for CEOs

Closing the Small to Mid-Sized Company Merger – Is It Too Risky to Ink the Deal?

Posted by Paul Sparrow



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In our previous post, we lit the fuse on the concept of how a merger or acquisition may be beneficial when swashbuckling one’s way through the uber-competitive marketing landscape of the present.

By making it this far, you may have decided that this strategy may be prudent -- especially now that you know when and why you might consider M&A for your company. So let’s now take a look at the downside of such an initiative—the “glass-half-empty scenario.”

What are the possible reasons why you would reconsider a merger or acquisition with another organization? Are there cautionary signs of trouble or weakness you should look out for before you sign on the dotted line?

In my experience, there are six primary hurdles that could delay – or derail – an imminent company merger. Knowing which warning signs to look for, and whether the issues recognized can ultimately be conquered, is the difference-maker that will tilt the odds of success in your favor:

  • Due Diligence Challenges: Did you ever notice in the old Western movies, when a rancher takes a herd of cattle to market, that the number of livestock he’s selling is always estimated? It’s a strange thing, but nobody walks around and counts the heads in the herd, one at a time. I don’t know why, but I sure would. Don’t you want to know exactly how many cattle you’re actually buying? Let’s face it—it isn’t like buying a bag of roasted peanuts at the ballpark. This is a big time transaction! The same goes for a merger or acquisition.

But, no matter how much time you spend in the due diligence phase, sometimes you can only glean a rough idea of the value or inventory conveyed in the deal. In this setting, a merger is risky, unless you really have a keen sense and insight for the company, its people, and their products. 

Even then, expect a few shallow graves and web-encrusted skeletons to appear, post-acquisition. You can hardly prepare for everything, particularly when a prospective acquisition target desperately wants or needs to be acquired. Most won’t show their dirty laundry – especially if it’s been festering for weeks or even months in the laundry bin. 

Unfortunately, inadequate communication between buyers and sellers often results in a fundamental misunderstanding of what the buyer is really buying, and what the seller is really selling. And if the rancher has grossly overestimated the number of cattle in this particular herd – things don’t generally go over too well with the buyer.

  • Imminent Integration Failure: Operations, product development, finance, HR, marketing and sales—all operate in their own, unique way within a given company. How can you ensure that two different organizational departments will coalesce and run together well?

Start by assessing the people and processes in both companies. How similarly do they conduct business? What are the differences? Can you discern a path of acceptable execution, or are the people and practices so radically different, that a non-anesthetized root canal would be a more enjoyable undertaking?

In particular, expect product integration or coupling to be difficult. Adding a new feature or product sounds easy enough—but consider the fine details. How much re-engineering will have to take place to offer a well-defined, functionally solid offering to your prospects and customers? Moreover, will the market respond favorably to the new company offerings or positioning, or will it fall back in anger or fear or confusion? 

Be certain to take the extra time to plan a path of successful integration before you sign the deal! 

  • One of These Things Is Not Like the Other: Even with the best intentions, some cultures simply clash. I often think of the famous scene in the movie Braveheart when the Irish, having just received mercenary wages from the English King Edward Longshanks, run toward William Wallace’s Scot army with swords raised, the fire of battle in their eyes. Suddenly they stop, just as they reach their opponents. Instead of swinging swords and axes they hold out their arms in friendly fashion and join the Scots, turning to battle alongside the forces they were paid to destroy. Disgusted, Longshanks grunts, “Irish!” but he might has well have said, “You just can’t trust the Irish!”

The lesson? Some cultures just don’t mesh well with others, and don’t assume it will simply work itself out over time. Dig in deep here, and trust your gut. If the cultures are so diametrically different, you might do well to reconsider the deal.

  • Too Rich for Your Blood: I used to play poker with a regular group of guys. Down a fistful of dollars and driven by emotion, every once in a while somebody would stay in a game longer than he should. Emotions – and sometimes even white knuckle panic – often lead to an all-in strategy when sounder minds and better judgment would counsel extreme caution. High-risk passions often result in paying way too much, and that will doom the merger or acquisition every single time. “All in” never goes well when anxiety runs high.
  • Market Repulsion: You may be excited about a fresh start, but your customers and prospective targets won’t necessarily share your sunny disposition about the pending change. Much like bringing your brand new girlfriend to a dinner party hosted by your exes’ BFF, you can simply freak people out without intending to.

Sorting through the M&A domino effect with customers and prospects can be daunting, and frequently, it’s the main reason that mergers and acquisitions fail.

Do you have a good idea of how the merger will affect your customers? What about prospects? Suppliers? Have you painstakingly assessed their potential reactions? Can you ensure they’ll embrace the new company -- instead of running for the hills?

  • Lack of Leadership Experience: Does your leadership team have much experience in M&A? Just navigating and negotiating through the due diligence stages is daunting enough. What happens after the merger? Do your leaders have a rock-solid plan for efficiently joining the companies, products and services? This is a lot like watching celebrities sign up for Dancing with the Stars. Just because someone can sing, crack jokes or act, doesn’t mean they are a world-class ballroom dancer! If your team is full of M&A novices, you’ll need seasoned, battle-tested resources to advise you through the aftermath.

No doubt, there is a lot to contemplate, and while a merger can be an extremely positive growth experience for your company, there are serious considerations that must occur before you can be certain you’re up to the task. After all, an acquisition or merger is the gift that keeps on giving…or taking!

Use this six-point list as your final “stress test” – and make sure you’ve carefully examined the fallout – before you proceed to the signing ceremony. As I’ll bet you already know, getting cold feet is a whole lot easier to navigate at the rehearsal dinner than at the wedding reception!

Considering a Company Merger - A Guide for SMB CEOs

Author

cmo-Paul-Sparrow_sm.jpg

Paul Sparrow is a Charleston, SC-based CMO at Chief Outsiders who supports CEOs and their leadership teams by helping them build and execute strategies that drive revenue and achieve company vision. While he’s not Irish and never fought for Edward Longshanks or William Wallace, he’s navigated a number of M&A battlefield adventures. He’d be happy to share his insights. You can contact him directly at 615.351.7189 or by email at psparrow@chiefoutsiders.com.            

Topics: Mergers & Acquisitions